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Last Updated: Monday, 16 February, 2004, 15:32 GMT
Do Letwin's sums add up?
Oliver Letwin
Letwin's plans depend on economic growth, say experts
Do the Conservatives' spending plans add up?

Shadow chancellor Oliver Letwin has promised to spend more on schools and hospitals but to avoid raising taxes.

Money would be saved on reducing the cost of running central government, defence and public services.

A policy of cost cutting to raise funds for the NHS and education is nothing new.

Tony Blair is said to be planning a similar programme.

The government has estimated it could spend from 10 -15bn more a year on health, education and policing if it transformed the way it worked, the Financial Times reports.

Sir Peter Gershon, head of the government's efficiency review, has estimated in a confidential document that the savings could be made by cutting up to 80,000 civil service jobs, the newspaper says.

Long-term savings

But are such huge savings attainable by any government?

According to head of macroeconomics at Price Waterhouse Coopers, John Hawsworth, Mr Letwin's plans may not be as ambitious as they first appear, as they cover a six-year period.

As the fine print admits... if the economy doesn't do well he won't be able to achieve this (cut spending)
John Hawsworth
"Oliver Letwin is only assuming that one tenth of his total savings - this 2% of GDP - comes from cutting the costs of government," he told the BBC.

"The rest comes from freezing all other budgets, apart from the NHS, schools and pensions, for the first two years and then keeping them growing at a lot less than the growth of the economy over the following four years."

Growth dependent

But he says Mr Letwin could run into trouble if the economy takes a dive.

"It's quite easy to cut the spending as a proportion of GDP if the economy is doing well and GDP is rising, not least because unemployment comes down.

"As the fine print admits... if the economy doesn't do well he won't be able to achieve this."

"If anything goes wrong, like a war, or he needs to make investment in the railway structure... it's going to be difficult to freeze or keep very low these increases in the other areas."

The Tories promise to spend more on health

However, Carl Emmerson of the Institute of Fiscal Studies (IFS) says that if GDP growth was lower, then Labour's economic policies would run into similar problems.

He says Mr Letwin's proposals could result in savings which could be spent elsewhere but that the Conservatives would have to come up with policies to support the blueprint.

"We need to see policies which are consistent with these reductions. There is still a lot of time, so it could be done," he said.

'Senstive cuts'

Robert Chote, the IFS's director, has pointed out that the proposed 2% cut would reverse only about half the increase in public spending seen under Labour since 1997.

That leaves cuts in areas like civil service administration, welfare payments other than pensioners and other big departmental budgets
Robert Chote
"It is actually relatively modest compared to the fall in public spending which occurred early in Labour's term of office when they were sticking with plans they inherited from the Conservatives," Mr Chote said.

"However, part of the problem for the Conservatives is that within this overall envelope they have also said they want to spend a higher proportion of national income on schools and hospitals and at least as much national income as we do now on pensioners."

"That leaves cuts in areas like civil service administration, welfare payments other than pensioners and other big departmental budgets," he told the BBC.

Those budgets include transport, law and order and defence - "both of which are touchstone Conservative issues".

The Treasury faces a 13bn gap between tax receipts and public spending commitments.

The black hole has led to speculation that a third-term Labour government will need to raise taxes.

The Conservatives have said they would cut taxes only when it was safe to do so.

But experts say Mr Letwin has been quiet on this issue and crucially has not outlined his plans for borrowing upon which tax cuts are partly dependent.

The BBC's Carolyn Quinn
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